Message-ID: <18840001.1075845820496.JavaMail.evans@thyme> Date: Wed, 7 Mar 2001 09:29:00 -0800 (PST) From: jklauber@llgm.com To: elizabeth.sager@enron.com Subject: Fwd: Marketing Arrangements Cc: szisman@ect.enron.com, kay.mann@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: szisman@ect.enron.com, kay.mann@enron.com X-From: "JOHN G KLAUBERG" X-To: Elizabeth.Sager@enron.com X-cc: szisman@ect.enron.com, Kay.Mann@enron.com X-bcc: X-Folder: \Kay_Mann_June2001_2\Notes Folders\Discussion threads X-Origin: MANN-K X-FileName: kmann.nsf Elizabeth: here is the PECO e-mail I referred to. After skimming it, I realize that if you find it at all worthwhile, you may ask to see a copy of the PECO/Great Bay lawsuit and the agreement involved. I'll see if Nellie can locate that as well. John "This e-mail, including attachments, contains information that is confidential and it may be protected by the attorney/client or other privileges. 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John Klauberg LeBoeuf, Lamb, Greene & MacRae, L.L.P. 212 424-8125 jklauber@llgm.com Content-Transfer-Encoding: quoted-printable Date: Tue, 27 Oct 1998 12:35:23 -0500 From: "JOHN G KLAUBERG" To: esager2@ect.enron.com cc: stweed@ect.enron.com Subject: Marketing Arrangements MIME-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Disposition: inline Elizabeth: Following up on our conversation last week, I have an associate pulling some of the relevant authority on the fiduciary duty/principal--agent issues we discussed in the context of some of the deals ECT is considering with respect to marketing the output of generation units of third party owners. We should be able to get back to you this week with our thoughts in that respect and we will forward to you the major authorities, articles, etc. that we come up with. My sense of the market is that it is likely that ECT may be approached by many owners of power plants as the markets further deregulate and some of the owners of "hard assets" realize that they do not have the resources necessary to participate in the wholesale power markets. And, with the further market participant fall-out to come (witness PacifiCorp's retrenchment announcement on Friday), ECT could end up with a larger share of this market perhaps resulting in multiple deals with third parties, even parties whose facilities may be viewed in competition with one another (based on load pockets, grid interconnection, etc.). I agree with you that these deals carry a lot of legal risk because of ECT's commanding presence in these markets. In addition, I found the PECO marketing contract with Great Bay Power ("GBP") that, as you know, resulted in litigation earlier this year. I faxed it to you this morning along with a copy of the complaint that GBP filed against PECO earlier this year. Set forth below are a few of the key aspects of the PECO/GBP Contract that I thought you might find of interest, including some of the contract language that bears on the fiduciary duty/ principal-agent considerations. I thought it made sense to focus on some of these, not because it is a great contract, but I think it illustrates many of the concepts that your commercial people may wish to employ in the proposed marketing deals they are currently examining. Further, you will see how many of the key provisions dealing with the key legal concepts are either unclear or confusing or never really addressed. 1. Term; Exclusive Agent Relationship. The Contract was for an initial term of 2 years. PECO is designated to act as GBP's exclusive agent in marketing the power from GBP's only asset; namely, its interest in the Seabrook nuclear plant. Except as noted in Paragraph 2 below, GBP could not sell to customers without PECO's consent. GBP apparently sought the PECO deal since it needed a party to "firm up" its sales; that is, it needed a party to back up its Seabrook power in the event Seabrook went down. GBP retained title to all power until title passed to third parties. Of further note is that in connection with the contract PECO also received a warrant to purchase up to 4.9% of the stock of GBP. (This is similar to what ECT proposed with El Paso a year or so ago, but ECT proposed a warrant to purchase a greater percentage of the stock of El Paso.) Note that the 4.9% limit is '35 Act driven. More than 4.9% would be a "second bite" under the '35 Act that would require prior SEC approval and, in addition, could be problematic for PECO under the limitations of such Act. 2. PECO's Authority to Effect Deals for GBP. PECO could effect transactions for GBP, although it could not execute deals of more than a year in duration without GBP's consent. PECO also had the right to negotiate "on behalf of" GBP enabling agreements (such as those necessary to effect NEPOOL transactions), although those agreements would only become effective upon GBP's consent (which could not be unreasonably withheld). Notwithstanding the foregoing, GBP could cause PECO to offer a sale of power on terms directed by GBP if the sale was for longer than six months, provided GBP could not require PECO to firm up such sale. If PECO felt this was not the best course of action, it could terminate the Contract. 3. PECO Standard of Care. Sec. 4(a) of the Contract provides that "PECO shall use 'reasonable best efforts' to arrange for the sale of the [GBP Power]" and that it "shall use the same care and diligence in arranging Transactions [involving the GBP power] as it uses in the sale of capacity and/or energy owned by PECO." PECO was authorized and required to use "reasonable judgment" during the negotiation and scheduling of transactions under the Contract. 4. Conflicting Sales Opportunities. Sec. 4(c) denominated "Bundling of Initial Power Amount" is of particular interest. Effectively, this provision requires that if some of the GBP power is available but not committed and PECO has other NEPOOL power available to it that can be used to effect a sale, then PECO shall be obligated to serve each such sale with both the GBP power and its own NEPOOL resources "until the [GBP power] is fully utilized." It is not exactly clear how this provision is intended to work, but I would assume that if PECO located a candidate for a sale transaction and PECO could use its own NEPOOL power (defined as "Other NEPOOL Supply") to serve it or, alternatively, it could use the GBP power, then PECO would have to make the sale using both sources of power. It is not clear whether PECO would have to apply the GBP first or whether a pro rata concept (perhaps based on the ratio of the GBP power to the total power available) would be permissible. Obviously, this type of a provision would have major implications for the considerations we have been discussing since ECT would not want to be required either to use its counterparty's power first to make a sale or to apply some form of pro rata concept (which would be incredibly difficult to apply and a ticket to litigation). 5. Notice of Conflicting Opportunities. Sec. 4(d) of the Contract, denominated "Economic Disincentive," similarly is interesting (and confusing). It provides, in effect, that if a portion of the GBP power is uncommitted but PECO owns Other NEPOOL Supply and PECO would make more of a margin by selling the Other NEPOOL Supply for its own account than effecting a deal for the GBP power, then "PECO shall notify GBP of such circumstances." What is interesting is that it just requires PECO to notify GBP; it does not appear that there is any restriction on PECO's right to sell such power, except perhaps the restriction set forth in Sec. 4(c) above. Perhaps the negotiators of the Contract know how these provisions tie together, but it is not clear from the Contract itself. This is very surprising since one would think that it would have been in both parties' interests to make it absolutely clear how the fiduciary duty/corporate opportunity responsibilities were to be handled. 6. Compensation. With respect to compensation, PECO paid GBP a "reservation fee" in consideration of GBP retaining PECO as its exclusive agent, which was based on a $ per MWh basis. GBP paid a "service fee" to PECO based on a % of net sales revenues. (It really wasn't on a net basis, however, since it effectively was based on gross revenues less transmission and ancillary services costs). 7. Commitments for Future Opportunities. Another interesting feature of the Contract was the parties' commitments to engage in "future joint opportunities." For example, Sec. 13(a) states that "PECO shall be obligated to provide Great Bay with the opportunity to participate in all purchases of [additional favorably priced power from facilities in New England having a term in excess of 1 year]." (Emphasis added). As with many other provisions of the Contract, it is not clear what happens if PECO and GBP do not agree on the sharing of costs, revenues, etc. with respect to such additional opportunities. 8. Early Termination Rights. In addition to termination for a breach of the Contract, GBP could terminate upon 30 days notice prior to certain dates (tied to the warrant expiration date). PECO, as noted at paragraph 2 above, could terminate on 90 days notice if GBP elected to effect a sale on its won (that essentially PECO felt would not maximize the parties' profits). 9. Choice of Law. PECO was able to get Pennsylvania law to be the governing law. Presumably, this was a function of the fact that GBP had less negotiating leverage and "needed" PECO to help it with firming up its sales. 10. The Litigation. In its complaint, GBP alleged, among other things, that since inception of the Contract PECO only effected two firm energy transactions for GBP. In addition, it asserted that PECO entered into a number of wholesale transactions for its own benefit, rather than in the name of GBP. I apologize for the length of this E-mail, but in light of the importance of these issues to the deals ECT is considering, I thought it made sense to give a flavor of the PECO/GBP contract. We will be back to you later this week with the outcome of our research. Please call me if you have any questions or need anything else. John